The Peak Oil Crisis: A Winter Update

As the years go by, those studying peak oil are beginning to develop a better understanding of what has been happening since the concept of limits to oil production came to widespread attention. First of all, it is important to understand that in one sense, production of what had been thought of as “conventional oil” really did peak back in 2005. While there has been growth in certain sectors of the “oil” industry in the last nine years it has come in what are known as “unconventional liquids” and as we shall see the maintenance of existing conventional oil production has come at a very high price.

The recent growth in the “oil” production has been nowhere near what had been normal prior to the “great recession” so that if anyone should wonder why our economy has been stagnant in recent years, one can take the price and availability of oil as a good starting point. US consumption has been falling at 1.5 percent a year since 2005 as opposed to a normal growth rate of 1.8 percent in prior years.

In the last decade global oil production grew by only 7.5 percent and not the 23 percent that would have been needed to support the growth the world’s GDP at a rate we would have liked to have seen. Since 2005, total “oil” production has grown by 5.8 million b/d of which 1.7 million consists of natural gas liquids (NGL). While NGL’s are valuable and a useful form of what we now call “oil”, they do not contain the same energy as crude and have a more limited range of uses thereby contributing less to economic growth.

US unconventional liquids (shale oil and NGL’s) now are up by 5.1 million b/d since 2005. Along with an additional million b/d from the Canadian tar sands, North American non-conventional liquids constitute nearly all the growth in the world’s oil supply in recent years. Production of conventional crude has remained essentially flat during the period. Moreover, OPEC production has dropped by nearly two million b/d in the last three years largely due to wars, insurgencies, and embargoes and another 1.7 million b/d of its “oil” production has been NGL’s and not crude.

The world’s existing fields are depleting at rate of circa 4 million b/d each year so without constant drilling of new wells in new fields global production will quickly wither and prices will climb still more. A good estimate is that the oil which now costs about $110 a barrel will be at $140 or above by the end of the decade unless some major geopolitical upheaval sends it still higher.

To keep the oil flowing, the world’s oil companies have invested some $4 trillion in the last nine years to drill for oil. About $2.5 trillion of this was spent on simply replacing production from existing oil fields. Even this gigantic expenditure was not enough since conventional oil production fell by 1 million b/d during the period.

About $350 billion went to drill shale oil and gas wells in the US, and increase Canadian oil sands production. This was clearly a bargain as compared to maintaining conventional oil production which now is focused on ultra-expensive deep water wells.

Recent announcements by the major oil companies indicate that they reached their limit. Profits and production are falling. Expenditures for finding and developing oil fields have tripled in the last decade and the return from these expenditures has not been enough to justify the costs. Nearly all of the major oil companies have announced major reductions in their exploration and drilling programs and several are selling off assets as they are caught in a trap between steady oil prices and rapidly rising operating costs.

Note that the major oil companies do not constitute the whole oil industry as most of the world’s oil production is now in the hands of state-owned companies and small independent producers. These firms are obviously facing the same problems as the large publically traded companies, without as much publicity.

What is going to happen in the next few years? First, investments in future production are going down, meaning that in a few years depletion likely will overwhelm new production and output of conventional oil will drop.

Then we have the Middle East which, to put it mildly, is coming unglued. Oil exports from several countries have nearly disappeared and the spreading sectarian violence is likely to reduce exports from other countries before the decade is out.

Venezuela, from which the US still imports some 800,000 barrels of crude a day, is not transitioning to the post-Chavez era gracefully. The current student riots could easily morph into reduced oil exports.

With much of the growth in global oil production coming from US shale producers, a fair question is just how long fracked shale oil production will continue to grow — opinions vary. Some foresee the possibility that growth will slow considerably this year, while others think there are two or three years of large production increases ahead. The three months of extremely cold and snowy weather we have had this winter is already hurting production, but most believe production will rebound in the spring.

Even though production of conventional oil peaked nine years ago, massive investment and a five-fold increase in oil prices has allowed the economical production of shale and deepwater oil at a profit since 2005. Further growth shale oil production, however, clearly has a half-life, be it one, three or five years.

Recent news concerning deepwater oil production is not encouraging. Brazil’s deepwater oil fields which are thought to contain many billions of barrels of oil are not looking too good at the minute due to the very high costs and risks of production. All in all, the recent news from the oil industry tends to be one of growing pessimism.

FCNP